Hong Kong Yuan Market Steps Forward

HONG KONG—Hong Kong's fast-growing yuan market is taking big steps forward with the introduction of benchmark interbank yuan lending rates and the loosening of restrictions on banks' trading of the Chinese currency.

The moves, announced Thursday, will enhance Hong Kong's status as an offshore yuan trading center as it faces increasingly tough competition from London, Singapore and Taiwan. And they come as international use of the yuan is on the rise—the result of a long, careful campaign by the Chinese government—and as the currency on Thursday hit its highest level against the U.S. dollar since the modern Chinese currency system was introduced in 1994.

The introduction of the interbank yuan rates, seen as a key development of the infrastructure of Hong Kong's yuan market, is widely expected to spur growth in the nascent offshore market for yuan loans and investment products.

Similar to the better-known London Interbank Offered Rate, or Libor, the published yuan interbank rates—the averages of interest rates Hong Kong banks charge each other for short-term yuan loans—will create transparency and boost confidence among financial institutions as they increase the volume of their yuan-denominated transactions.

The Hong Kong Monetary Authority, the city's de facto central bank, said the benchmark rates will be created in June.

The HKMA said it also gave local banks a freer hand in trading the yuan, effective immediately. It removed the requirement that banks hold a certain amount of their yuan-denominated assets as liquid assets and eliminated restrictions on their bets on the currency's movement. Previously, banks could only take positions on the yuan equivalent to a maximum of 20% of their yuan-denominated assets or liabilities.

While the market for offshore yuan bonds, or "dim sum" bonds, has grown rapidly in Hong Kong, yuan-denominated lending has grown more slowly, partly due to a lack of benchmark rates and hedging products, bankers and analysts said.

The interbank rates are expected to speed up development of the offshore yuan loan market as well as yuan-denominated investment products such as interest-rate swaps, options and other derivatives.

"The introduction of an offshore [yuan] interest-rate benchmark is an important step forward in enhancing the market infrastructure for offshore renminbi," said Gordon French, head of global markets for Asia Pacific at
HSBC Holdings
PLC, referring to the Chinese currency's official name. "This will enable companies and investors to hedge risk and take investment views."

The interbank yuan lending rates will include durations ranging from overnight to 12 months, and will be taken from 15 to 18 banks that are active in the yuan market, the HKMA said.

The Libor, the most common global benchmark for short-term lending rates, was the subject of controversy last year when it was reported that banks had submitted false rates to profit from trades.
John Tan,
head of global markets at
Standard Chartered
PLC, said he believed Hong Kong banks will be more "cautious."

"Without the benchmark rates, all the interest-rate derivatives in yuan can't be developed. The benefits of launching such benchmark rates are more important than anything else," he said.

The yuan has gained in stature and strength in recent months as it has begun to flow more freely across borders.

Australia's central bank said this week that it would invest up to 5% of its foreign-currency assets in Chinese sovereign bonds, a milestone in the two countries' increasingly intertwined financial relationship. The central bank's announcement came quickly on the heels of an agreement between the two countries to make their currencies directly convertible.

The People's Bank of China also appears to be relaxing its grip on the yuan's trading just a bit. Earlier this month, Vice Gov. Yi Gang said the exchange rate would be "more market-oriented," and that the currency's permitted daily trading range would be widened. In recent days, the central bank has progressively raised the level at which the currency starts trading each day.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.